Cape Cod property owners could see huge flood insurance price hike with 'Risk Rating 2.0'

Feb. 25—YARMOUTH — Coastal property owners are accustomed to getting a jolt from nature. Nor'easters, the occasional hurricane, even unexpectedly big tides can mean expensive repairs or replacement of an entire structure.

In recent years, changes to the insurance policies that cover those damages led to additional sticker shock with the threat of skyrocketing rate increases.

In 2013, it was the redrawing of Federal Emergency Management Agency flood plain maps, used to calculate risk and determine premiums for the National Flood Insurance Program, that added thousands of Cape properties to flood zones. That meant the newly added property owners with federally backed mortgages were required to purchase flood insurance, with rate increases as high as $20,000 for some who already had insurance.

State and federal lawmakers stepped in to ease the premium increases after a loud backlash from property owners.

Later this year, FEMA will be implementing a new way to assess risk and adjust rates that some experts say could result in significant rate increases for Cape and Islands property owners in high-risk flood zones.

FEMA calls the new system "Risk Rating 2.0." On its website, the agency said it is taking advantage of updated technology and industry best practices to deliver rates that are fair, easier to understand and reflect each property's true flood risk.

"The basics are that flood insurance rates (in the new FEMA rating system expected to launch in October) are based on how close you are to the source of flooding," said Shannon Hulst, deputy director and flood plain specialist for the Barnstable County Cooperative Extension.

On Monday, the research group First Street Foundation (which produces the floodfactor.com tool for property owners and the real estate industry to assess the risk of individual properties) released its projection on potential FEMA rate increases derived from a model they say will be similar to the methodology used by the federal agency.

The First Street model includes a rate analysis for six Cape villages and towns and the island of Nantucket. It showed an average rate increase of between 15% and nearly 700% that would be needed to pay for their estimate of the structural damage for each property if it was amortized over the 30-year span of a mortgage.

In East Falmouth, for example, First Street found there were 167 residential properties that could suffer significant damage from a 100-year storm, which is defined as a storm of a size and power that has a probability of occurring once in 100 years.

They used existing databases from sources such as the Army Corps of Engineers, national assessors' databases and real estate industry data to identify vulnerable homes and determine their value.

They calculated that in East Falmouth owners of those homes are paying on average $1,244 a year in flood insurance premiums, but they should be paying on average $7,700 in annual premiums in order to fully cover

At the top end, owners of Nantucket's 190 most at-risk properties would have to pay $10,500 in annual premiums to underwrite rebuilding costs, while their current annual average estimated premiums are only $1,220. The difference between the two translates to a rate increase of nearly 700%.

"Don't panic yet," Hulst said. The First Street data is just a best guess, and FEMA could still change the program or delay it. Plus, there are annual caps on how much the rates can go up, with an 18% limit for primary homes and a 25% limit on businesses and second homes. Those who are purchasing a new policy, however, could be subject to the full rate.

"I'm not an alarmist about Risk Rating 2.0," said Joe Rossi, the flood specialist for Rogers/Gray insurance. He also serves as the chairman of the Massachusetts Coastal Coalition and co-chair of the National Flood Association's legislative committee. He said a lot more goes into calculating actual insurance premiums than what was in the First Street analysis. While some homeowners might see a big increase, others will see reductions in their premiums or no change.

Flood zones fall into three major categories, with subcategories in each: special flood hazard areas that have a 1% chance of experiencing the impacts of those 100-year storms; moderate flood hazard areas that have a 1 in 500 chance of being affected by those severe storms; and minimal flood hazard areas that are outside the moderate zone and at higher elevations.

Neighboring properties can be classified in different zones and have very different premiums under the current system, Rossi said. When evaluating risk on each property, Risk Ratings 2.0 will be less like stairs with large steps between adjoining properties and more like a ramp with gradations reflecting the real difference in flood risk between conditions on one property vs. another, he said.

Some worried that the burden of high flood insurance rates might make some properties undesirable and erode their market value.

"Ever since the first Biggert-Waters Act (in 2012 that funded the new FEMA maps) flooding has been an issue, (but) buyers are still making that decision to buy, "said Ryan Castle, executive director of the Cape and Islands Association of Realtors. "They've already been looking at this as a factor in their homebuying decision."

By applying premiums on a property-by-property basis, the new rating system could address another inequity. Payouts in the National Flood Insurance Program are capped at $250,000. Under the current system, the owner of a $1 million home and that of a $150,000 home could pay the same premium, but get a different payout after a catastrophe, Rossi said.

He and Hulst cautioned consumers about taking First Street predictions as gospel. While FEMA may use a similar methodology to calculate risk, Hulst said the federal agency incorporates another layer of property owner verification. Because it lacks such input, First Street's analysis would potentially have a wide margin for error on individual properties, she said.

"My biggest concern lies in making people understand that the data is not perfect," Hulst said. "The only thing that will determine your rate is your FEMA flood map and their risk rating."

One area where First Street surpassed FEMA was in looking 30 years into the future and incorporating sea rise and storms into rate predictions, said Greg Berman, a coastal processes specialist at Woods Hole Sea Grant and the county extension service. The Cape has already seen nearly a foot of sea rise over the past century, and predictions are for between four and 10 feet more by century's end.

"If you're building something, you have to be concerned about its life span out to 50 years," Berman said. "You have to take into account sea-level rise."

The difference between the flood damage potential of the storm surge of a less powerful 10-year storm and an epic 100-year event is only about a foot for many parts of the Cape, Berman said.

The First Street model looked ahead to 2050 and predicted the premiums needed for existing at-risk structures in a stormier world with higher sea levels. The model predicted that by 2050 South Yarmouth's 243 at-risk homes would require an annual premium of nearly $3,000, a 481% increase over 2020. Nantucket's would soar by over 1,221%.

But even if a property owner experiences a big increase, there are ways to reduce that cost.

Nine Cape towns have already qualified for up to a 15% discount on flood insurance for residents by participating in the National Flood Insurance Program Community Rating Service. It offers tiered discounts to all property owners purchasing flood insurance based on each town's level of participation in public education, mapping and higher regulatory standards within flood plain areas, and flood control, drainage, property acquisition and other factors.

Another way to reduce insurance costs is to make the structure more resistant to flood damage by moving utilities and appliances out of the basement and above flood levels. Breakaway panels in basements that allow water to flow through, elevating the building on a foundation, or placing it on pilings are all ways that can reduce damage, Hulst said, and lower insurance rates.

Follow Doug Fraser on Twitter:@dougfrasercct

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